The high cost loans industry including payday loans has always come under fire for charging exorbitant interest rates and creating further financial problems for those who struggle to repay.
Around 3 million Britons take out payday loans every year, with around a quarter of them unable to pay them back and often caught in an ongoing spiral of debt.
The FCA, the city regulator, has made significant ground to regulate the industry which has seen a strict authorisation process and daily price cap. In addition, with ongoing compensation claims and refunds, the payday loans industry has diminished from more than 200 lenders to around 30 in the last 5 years.
The demand for high-cost loans is still very consistent, especially since it is an anti-poverty measure and the ability to apply online and get funds into your account in 15 minutes remains a very appealing proposition.
However, the role of salary finance is starting to gain momentum and some argue that it could replace the need for payday and other high cost loans.
With salary finance, provided by the likes of Wagestream, Hastee and Salary Finance, people are able to draw down their wages in real-time from the employer. So if a person has worked 14 days, they can receive the amount they have earned upfront, rather than wait until payday. There are limits to how much you can take out and how often, to avoid people becoming overly dependent, but the service is interest-free to the employee and is considered an employee benefit.
With salary finance companies receiving millions in funding, they have the scalability to become household names and truly replace high cost lending. It requires employers to sign up and whilst there are more incentives for large firms with thousands of employees, it is now a matter of getting SMEs on board too which make up 61% of the country’s employment .
Beyond salary finance, there are other alternatives and well-funded startups that promote good replacements to high cost lending. This includes peer to peer platforms such as Fund Ourselves and The Money Platform which allows individuals to lend out to other borrowers, earning an interest depending on their credit risk appetite. This creates a diversified way for people to lend out money but also for people with bad credit scores to get access to the finance they need.
In 2012, the payday loans sector was at its peak and worth around £2.2 billion. Today it is worth less than £100 million. With strong regulation and compensation claims, the industry is slowly and slowly diminishing. There will need to be something to take its place and this is likely to come from innovative and well-funded startups. Whether this is salary finance, only time will tell.